Residential Capital LLC, one of Ally Bank’s mortgage-lending units is struggling and — according to the Wall Street Journal — is in danger of bankruptcy.
Although the company has not made final decisions on the apparent struggles of ResCap, there have been individuals “familiar to the situation” who have spoken with the Wall Street Journal.
ResCap Reports Major Losses
Ally Financial has three divisions when it comes to mortgage operations; ResCap, ResMore Trust, and Ally’s own mortgage operations. This bankruptcy filing would look extremely bad for Ally because of the $17 billion awarded in bailout aid.
Ally Financial’s IPO Filings and financial reports make it very clear that something needs to change in the institutions relationship with ResCap. In just the past two quarters ResCap has reported a loss of $555 million with a projected $2.3 billion of debt scheduled for the next two years.
Bankruptcy: The Options
Bankruptcy has not been officially decided for the mortgage-lending unit, but there needs to be a change. Ally Financial has turned to law firm Kirkland & Ellis and investment bank Evercore Partners Inc. on a potential restructure to ResCap.
Ally may also explore the option of trying for a strategic bankruptcy which would limit exposure to ResCap allowing for an easier road to public offerings of its shares. Or, Ally Bank could just cut all ties with ResCap, forcing the lender to file bankruptcy.
Ally Financial’s Reputation at Stake
When phrases such as “posted loses” and “bankruptcy filings” are being tossed around it would seem like public image would be low on the priority list. This is in fact the opposite, as Ally’s struggling mortgage unit launches the company into the public eye it is crucial that they maintain consumer confidence in the brand.
Take Bank of America (NYSE: BAC), for example. When rumors of struggles within Countrywide Financial — a mortgage subsidiary of Bank of America — surfaced, Bank of America experienced a share price decline. In the end the bank decided not to go with bankruptcy and instead took an $8.5 billion settlement currently waiting on court approval.
People are concerned with the welfare of these large institutions’ subsidiaries because a parent company that cannot keep subdivisions operating smoothly demonstrates a lack of business savvy.